Case 9 Teaching Note Blue Nile Inc.

in 2010: Will Its Strategy to Remain Number One in Online Diamond Retailing Work?

Case 9 Teaching Note

Blue Nile Inc. in 2010: Will Its

Strategy to Remain Number One in
Online Diamond Retailing Work?
Overview
Founded in 1999, and taken public in 2004, Blue Nile had grown to become the worlds largest online retailer of certified
diamonds and fine jewelry, with sales of $302 million in 2009 (up from $169.2 million in 2004). The vast majority of Blue
Niles sales were diamond engagement ringsthe company had sold more than 200,000 engagement rings by the end of
2009. Blue Nile was ranked 58th in Internet Retailers Top 500 Guide to Retail Web Sites in 2009 and had been named
best online retailer by Kiplinger Personal Finance each year between 2006 and 2009. It had been listed as a Forbes
Favorite by Forbes magazine every year since 2000. In addition, Blue Nile had received the BizRate.com Circle of
Excellence Platinum Award, which recognized the best in online customer service as ranked by actual consumers. A March
2008 article in The Economist said, Creating a website that looks good and makes it easy for men to learn about diamonds
before buying has turned Blue Nile into the leading online seller of jewelry, confounding predictions that luxury and ecommerce would never mix.
In 2009, jewelry sales in the United States were estimated at $58.8 billion. Industry revenues had grown by approximately
5.5 percent annually since the mid-1980s to reach a peak of $60 billion in 2007 before declining after the onset of the U.S.
recession in 2008. Diamond jewelry sales were particularly hard hit by the recession, with industry sales declining from
$32.5 billion in 2005 to an estimated $29.5 billion in 2009. Blue Niles revenues fell by nearly 8 percent between 2007 and
2008 before improving by 2.5 percent between 2008 and 2009. The companys strategywhich was keyed to having a
large inventory of high-quality diamonds, exceptional customer service, and low priceshad allowed it to weather the
effects of the U.S. recession far better than most of its rivals in the industry.
However, in 2010, Blue Nile management remained concerned about the lingering effects of poor economic conditions in
the United States on the diamond jewelry industry, the increasing number of brick-and-mortar jewelers that had begun
selling online, and weaknesses in the companys strategy that might limit its growth and competitiveness. Also of concern
was how the company might encourage a greater percentage of jewelry consumers to shop online for jewelry purchases,
how it should go about increasing its sales of diamond jewelry other than engagement rings, and how aggressively it should
pursue expansion in international markets.
Blue Niles strategy to attract customers had two core elements. The first was offering high-quality diamonds and fine
jewelry at competitively attractive prices. The second entailed providing jewelry shoppers with a host of useful information
and trusted guidance throughout their purchasing process. Top management believed that Blue Niles strategy of providing
educational information, in-depth product information, and grading reports, coupled with its wide product selection and
attractive prices, were the key drivers of the companys success and, ideally, would lead to customers looking on Blue Nile
as their jeweler for life. According to Blue Nile management:
We have established and are continuing to develop a brand based on trust, guidance and value, and we
believe our customers view Blue Nile as a trusted authority on diamonds and fine jewelry. Our goal is for
consumers to seek out the Blue Nile brand whenever they purchase high quality diamonds and fine
jewelry.

9-1

Case 9 Teaching Note Blue Nile Inc. in 2010: Will Its Strategy to Remain Number One in Online Diamond Retailing Work?

Suggestions for Using the Case

The Blue Nile case has all the ingredients for an outstanding and enlightening case assignment and class discussion. You
will find that it is a good vehicle for having students identify and evaluate a companys strategy and wrestling with the
strategic issues that surround Blue Niles status as an early mover and leader in an emerging market segment with sizable
growth potential. You can assign the case at any juncture once you have covered Chapters 1-5.
We see Blue Nile as an ideal case for drilling students in the tools of analysis covered in Chapters 3 and 4 (especially
Chapter 4) and then having them translate their analysis into action recommendations. Students will have to do some
strategic thinking about the competitive forces Blue Nile confronts and the key success factors for an online jeweler,
conduct a SWOT analysis and a competitive strength analysis, identify the strategic issues confronting Blue Nile
management and make action recommendations.
The case is a short 14 pages in length (something students always like) and the analysis that is required is not overly
demandingmaking it highly suitable for an assignment in the first half of your business strategy module (Chapters 1-7
and cases 1-15). Students wont have to scramble to understand Blue Niles business and they are virtually sure to have
some convictions and opinions about shopping at Blue Nile and the companys prospects for future market success. The
Blue Nile case should have particular appeal to female students.
There is a three-minute on YouTube dated December 2, 2009 that we recommend showing at the very beginning of the
class. It focuses on the jewelry industry and Blue Nile and is titled Blue Nile: Diamond Deals. It can be accessed at
http://www.youtube.com/watch?v=HVwZntOxMec&feature=related.

The Connect-based Exercise for the Blue Nile Case. We developed an exercise for Blue Nile for
inclusion in the publishers Connect Management web-based assignment and assessment platform because:
The case is very appropriate for use early in the course (following coverage of Chapters 3, 4, and 5).
One of the purposes of the case exercises is to drill students in applying the analytical tools discussed in the chapters to
the circumstances posed in the cases.
This particular Connect-based exercise focuses on:
Identifying the key success factors in the online jewelry industry (Assignment Question 2).
Conducting a SWOT analysis of Blue Nile (Assignment Question 5).
Using the financial ratios in Table 1 of Chapter 4 to evaluate the caliber of Blue Niles financial performance in 2008
and 2009 (Assignment Question 6).
It should take class members 30 to 40 minutes to complete the Blue Nile exercise on the Connect platform, provided they
have read absorbed the content of Chapters 3 and 4 and have done a conscientious job of reading the case.. All aspects of
this particular exercise are automatically graded and entered in your electronic grade book that is part of the Connect
platform, which makes it easy for you to evaluate the caliber of each class members preparation and prowess in evaluating
Blue Niles situation.

9-2

Case 9 Teaching Note Blue Nile Inc. in 2010: Will Its Strategy to Remain Number One in Online Diamond Retailing Work?

What to Tell Students in Preparing the Blue Nile Case for Class Discussion. To give
students guidance in what to do and think about after reading the Blue Nile case, we strongly recommend two things:
1. Have class members complete the Connect-based exercise for the Blue Nile case.
2. Provide class members with assignment questions (in addition to what is covered in the Connect exercise) and
insist that they prepare good notes/answers to these questions before coming to class . Our recommended
assignment questions for the Blue Nile case are presented in the next section of this TN. Since there are 9
suggested assignment questions, you may want to have students focus on a subset of the questions (depending on
how you want to conduct the class discussion).
To facilitate your use of assignment questions and making them available to students, we have posted a file of
the Assignment Questions contained in this teaching note on the student section of the publishers Online
Learning Center for the 18th edition (www.mhhe.com/thompson). (You should be aware that there is a set of
assignment questions posted in the student OLC for each of the 28 cases included in the 18 th edition.)
In our experience, it is quite difficult to have an insightful and constructive class discussion of an assigned case
unless students have conscientiously have made use of pertinent core concepts and analytical tools in preparing
substantive answers to a set of well-conceived study questions before they come to class. In our classes, we expect
students to bring their notes to the study questions to use/refer to in responding to the questions that we pose.
Moreover, students often find that a set of study questions is useful in helping them prepare oral team presentations
and written case assignmentsin addition to whatever directive questions you supply for these assignments.
Hence, we urge that you provide students with assignment questionseither those we have provided or a set of
your own questionsfor all those aspects of a case that you believe are worthy of student analysis or that you plan
to cover during your class discussion of the case.

Suggested Assignment Questions for an Oral Team Presentation or Written

Case Analysis. The Blue Nile case works quite well for either written case assignments or oral team presentations.
Candidate assignment questions are as follows:
1. Blue Nile management has employed you as a consultant and asked you to assess the companys overall situation and
recommend a set of actions to improve the companys future prospects. Please prepare a report to the senior executives
at Blue Nile that includes
an evaluation of the competitive forces facing Blue Nile and other online jewelers,
a discussion of the key success factors for an online jeweler,
a weighted competitive strength assessment using the methodology in Table 4.4 on p. 123 of Chapter 4,
an identification of the strategic issues and problems that Blue Nile management needs to address, and
a set of action recommendations to deal with these issues and problems.
Your report should be 4-6 pages plus it should include an assortment of charts, tables, and exhibits to support your
analysis and recommendations.

9-3

Case 9 Teaching Note Blue Nile Inc. in 2010: Will Its Strategy to Remain Number One in Online Diamond Retailing Work?

2. Blue Nile management has employed you as a consultant to assess the companys overall situation and recommend a
set of actions to improve the companys future prospects. Please prepare a report to the senior executives at Blue Nile
that includes
an evaluation of Blue Niles strategy and business model,
an assessment of Blue Niles strengths, weaknesses, opportunities and threats,
an evaluation of its strategic and financial performance,
an identification of the strategic issues and problems that Blue Nile management needs to address, and
a set of action recommendations to deal with these issues/problems.
Your report should be 5-6 pages plus it should include an assortment of charts, tables, and exhibits to support your
analysis and recommendations.

Assignment Questions
1. How strong are the competitive forces confronting Blue Nile and other online retail jewelers? Which one of the five
competitive forces is the strongest? Do a five-forces analysis to support your answer.
2. What key factors will determine a companys success in the online jewelry business in the next 3-5 years?
3. What is Blue Niles strategy? Which of the five generic competitive strategies discussed in Chapter 5 most closely fit
the competitive approach that Blue Nile is taking? What type of competitive advantage is Blue Nile trying to achieve?
4. What do you like and dislike about Blue Niles business model?
5. What does a SWOT analysis of Blue Nile reveal about the overall attractiveness of its situation?
6. What is your appraisal of Blue Niles financial performance based on the data in case Exhibit 5? How well is the
company doing financially? Is there evidence that Blue Niles strategy is workingwhat is the story of the numbers in
case Exhibit 4? Use the financial ratios in Table 4.1 of Chapter 4 as a guide in doing the calculations needed to arrive at
an analysis-based answer to your assessment of Blue Niles recent financial performance.
7. Does Blue Nile have adequate competitive strength to go head-to-head against its rivals? Do a weighted competitive
strength assessment using the methodology presented in Table 4.4 on p. 123 of Chapter 4 to support your answer. Has
Blue Nile built a sustainable competitive advantage in the online retail jewelry business? Why or why not?
8. What strategic issues and problems does Blue Nile management need to address?
9. What recommendations would you make to Blue Nile management to strengthen the companys competitive position
and future strategic and financial performance?

9-4

Case 9 Teaching Note Blue Nile Inc. in 2010: Will Its Strategy to Remain Number One in Online Diamond Retailing Work?

Teaching Outline and Analysis

1. How strong are the competitive forces confronting Blue Nile and other online
retail jewelers? Which one of the five forces is the strongest?Do a five-forces
analysis to support your answer.
Below is a representative five-forces model of competition in the online jewelry industry:

Rivalry among online jewelersa fairly strong competitive force that is intensifying (owing to the success that
Blue Nile is enjoying and to the growing presence, size, and marketing efforts of other online jewelers)
In assessing this competitive force, students should be asked to draw upon the presentation in Table 3.2 and Figure 3.4
and the related text discussion in Chapter 3.
Rivalry among online jewelers is centered on such factors as

Price and value delivered to customers

Selection and breadth/variety of product offerings

Ability to customize and types of customization options

9-5

Case 9 Teaching Note Blue Nile Inc. in 2010: Will Its Strategy to Remain Number One in Online Diamond Retailing Work?

The caliber and trustworthiness of the information/guidance provided to online shoppers (educational
information, in-depth product information, access to professional grading reports, and so on)

Image/reputation

Delivery times

Customer service

User friendliness of web sitesearch functionality, ease of browsing through all the selections, finding and
understanding the information provided, etc.

Refund and return policies

Advertising and promotionMuch of the advertising/promotion is being done online. Word-of-mouth is a big
factor, also. The online jewelry business is not one where firms are a regular or even infrequent user of TV,
radio, and newspaper advertising.

Most online jewelry competitors pursued either a differentiation strategy to try to set themselves apart or else tried to
attract shoppers via the appeal of very low prices (which entailed employing a low-cost strategy). Some rivals focused
their efforts narrowly on particular jewelry items/product categories while others had broad product lines.
Several factors were working to affect rivalry among industry participants:

All rivals seem to be actively and busily trying to attract jewelry shoppers to their websites, partly via online
advertising and promotional initiatives (including search engine listings)frequent and fresh strategic
initiatives on the part of various rivals heightens rivalry.

Low switching costs on the part of buyersit is simple for people shopping for jewelry online to locate, visit,
and shop competitor web sites.

Rivalry decreases when the rate of market growth risessales of jewelry online seem to be growing briskly
(with the sales increases coming at the expense of brick-and-mortar jewelry retailers). There is reason to
suspect that the online jewelry segment of the overall retail jewelry industry is in its infancy (an emerging
business or industry in its own right); hence, online sales of jewelry are likely to grow faster than sales of
jewelry in generala condition which will act to contain rivalry among online jewelers.

Rivalry increases when one or more rivals are dissatisfied with their market position and launch moves to
bolster their standing at the expense of rivals. A case can be made that Blue Nile and most all of its online
rivals are dissatisfied and thus are likely to make further moves to bolster their market standing, image, and
sales.

Rivalry increases as the product offerings of rivals become more standardizedmany of the online jewelers
seems to be offering shopper many of the same thingswide selection, customization, educational
information, access to grading reports, and so on. We see the differentiation among online jewelry rivals as
growing smaller/weaker, not larger/strongerwith the possible exception of reputation/image, where Blue
Nile seems to be the standout leader.

Threat of entrya moderate to weak competitive force as of 2010

In assessing this competitive force, students should draw upon the presentation in Figure 3.5 and the related text
discussion in Chapter 3.
Blue Niles success and growing reputation has already attracted numerous online competitors. Brick-and-mortar
jewelers, especially chain-store jewelers, had recently begun selling jewelry at their websites. More competitors are
likely to be drawn into creating websites and selling online in the years ago, despite the lingering effects of the 20082009 economic recession.

9-6

Case 9 Teaching Note Blue Nile Inc. in 2010: Will Its Strategy to Remain Number One in Online Diamond Retailing Work?

The barriers to entry into the online segment of the jewelry industry are moderately low; the barriers include:

The costs of developing a Web site.

Developing supply chain relationships

Developing order fulfillment capability and achieving short delivery times

Expenditures for advertising and promotion needed to draw visitors to a web site and build a trustworthy
reputation/image.

The pool of possible entry candidates is moderately largeand includes primarily multi-store brick-and-mortar
retailers already in the jewelry business who opt to begin selling online. On the other hand, the bulk of entry into
online jewelry sales has probably already occurred as of 2010---the websites of chain-store jewelry retailers are a
much larger competitive threat than the websites that relatively small regional and local jewelry retailers may create in
the future..
Hence, the entry threat in upcoming years should be viewed as moderate to weak. The longer a company delays entry,
the harder it will be to compete effectively against online jewelers like Blue Nile that have built a clientele and that
have formidable images/reputations and against chain-store jewelry retailers that have created websites to sell their
products online.
Competition from substitute sellers of jewelrya very strong competitive force.
In assessing this competitive force, students should draw the presentation in Figure 3.6 and the related text discussion
in Chapter 3.
Obviously, jewelry shoppers have many other options for buying jewelry than from online retailers. Traditional brickand-mortar jewelry retailers have the lions share of the market and currently are the retailers of choice for the big
majority of jewelry shoppers. Hence, the competition that online jewelers face from other jewelry retailers is quite
formidable.
In addition, there are hordes of possible substitutes for jewelry altogether (but most people are unlikely to see these
alternatives as good substitutes).
Consequently, students should conclude that substitutes for buying jewelry online are a strong competitive force, given
that

Acceptable substitute sources for purchasing jewelry are readily available and the prices charged by some of
these substitute types of jewelers are reasonably competitive

Buyer costs to switch to substitute types of jewelry retailers are relatively low

Many consumers are familiar with and comfortable with buying jewelry from other than online jewelry
retailers.

The bargaining power and leverage of suppliers to the online jewelry retailers and jeweler-supplier
collaborationa moderately strong competitive force, especially as concerns the suppliers of diamonds/gems and
other jewelry items.
In assessing this competitive force, students should utilize Figure 3.7 and the related text discussion in Chapter 3.

9-7

Case 9 Teaching Note Blue Nile Inc. in 2010: Will Its Strategy to Remain Number One in Online Diamond Retailing Work?

The suppliers of gems/diamonds/jewelry items have considerable bargaining power and leverage in determining the
prices and terms at which they will supply their products. Yes, there are many alternative suppliers, and it would seem
relatively easy for a retail jeweler to switch its gem/diamond purchases from one supplier to another. But it is doubtful
that suppliers compete aggressively with one another on pricein other words, switching suppliers is unlikely to lead
to acquiring a particular gem of particular quality at a lower price. There is no evidence in the case that suppliers of
diamonds/gems compete with one another on the basis of pricethey very likely sell the gems to retail jewelers of all
types at similar if not identical prices. There is no information in the case indicating that gem suppliers compete among
one another on the basis of price in their efforts to win the business of jewelry retailers. Blue Niles lower prices
relative to brick-and-mortar jewelers stem from its lower costs of doing business, not from the fact that it obtains
diamonds/gems at lower prices than do traditional retail jewelers.
What is important for students to recognize here is that Blue Niles close collaboration with its diamond/gem
suppliers has resulted in giving it a lower-cost value chain as compared to traditional chain store and Main Street
jewelers. The distinctive feature of Blue Niles supply chain was its arrangements with leading diamond and gem
suppliers that allowed it to display the suppliers diamonds and gems on its web site; some of these arrangement
entailed multi-year agreements whereby designated diamonds of the suppliers were offered to online consumers only at
Blue Niles websites. Blue Niles suppliers represented more than half of the total supply of high-quality diamonds in
the U.S. Blue Nile did not actually purchase a diamond or gem from these suppliers until an order was placed by a
customer; this enabled Blue Nile to minimize the costs associated with carrying large inventories and limited its risk of
potential mark-downs.
Other online jewelers seem to have similar collaborative arrangements with their diamond/gem suppliers. These
collaborative arrangements offer a sizable cost advantage over brick-and-mortar jewelers and put added competitive
pressure on chain-store and local jewelers because such collaboration (and the resulting lower-cost business model)
puts them at a cost disadvantage.
The bargaining power and leverage of jewelry shoppersa weak competitive force
In assessing this competitive force, students should utilize the presentation in Figure 3.8 and the related text discussion
in Chapter 3.

Individuals have little power to bargain for a lower price on the jewelry items they are looking to purchase
(except perhaps in the case of very expensive items where some price haggling is often fairly normal).
Individuals can, of course, choose to buy or not buy at the marked price but no one individual is usually in a
position to enter into direct negotiations over the terms and conditions under which he or she will purchase a
diamond ring or other jewelry item from an online retailer. Any individual can certainly opt to buy from one
retailer rather than another, but this does not equate to bargaining and exerting leverage.

Conclusions concerning the overall strength of competitive forces: Competitive pressures in online jewelry retailing
are strong but not overwhelming so (the best evidence for this is Blue Niles record of attracting new customers and
growing its sales at a rapid clipa convincing sign that it is able to successfully contend with the prevailing
competitive forces, despite the obvious effect of the 2008-2009 economic recession on the entire jewelry industry.
Competition from substitute types of jewelry retailers and rivalry among the existing online sellers of jewelry are far
and away the two strongest of the five competitive forces. The former is probably stronger than the latter, given that
online jewelry sales are a small fraction of total jewelry sales industrywide.
Moreover, while the combined strength of the five competitive forces results in fairly strong competitive pressures on
online sellers of jewelry, it is not so strong as to prevent companies like Blue Nile from being profitable. The online
jewelry retailing portion of the jewelry industry is rather attractive from the standpoint of promising growth and
attractive long-term profitabilityBlue Nile is demonstrating that its business model and strategy are quite attractive.
But online sales of fine jewelry are likely to remain a comparatively small fraction of total sales of fine jewelry for
years to cometraditional brick-and-mortar jewelers are not going to be driven out of business by online jewelers in
the foreseeable future.

9-8

Case 9 Teaching Note Blue Nile Inc. in 2010: Will Its Strategy to Remain Number One in Online Diamond Retailing Work?

2. What key factors will determine a companys success in the online jewelry
business in the next 3-5 years?
The identification of key success factors for online jewelry retailers is a pretty easy task. The list that students come up
with should include most all of the following:
A wide product line
Effective collaborative arrangements with diamond/gem suppliers that allow an online jeweler to display a large
variety of stones (but not purchase them until they are ordered by a customer)
An informative and educational website, with good search features and purchasing guidance
Professionally credible grading reports on all the diamonds displayed
Ability to offer customization
Attractive pricing
A trustworthy reputation and brand name image

3. What is Blue Niles strategy? What type of competitive advantage is Blue Nile
trying to achieve?
Blue Niles strategy had two core elements:
Offering high quality diamonds and fine jewelry at competitively attractive prices.
Providing jewelry shoppers with educational information, in-depth product information, grading reports, and
trusted guidance throughout their purchasing process.
In addition, there were several other important strategy elements:
Wide product selectionas many as 60,000 independently certified diamonds and styles of fine jewelry, including
rings, wedding bands, earrings, necklaces, pendants, bracelets and watches.
Ability to offer customization and deliver the customized orders within several days
Supply chain efficiency, driven principally by collaborative partnerships with important diamond/gem suppliers

The distinctive feature of Blue Niles supply chain was its arrangements with leading diamond and gem
suppliers that allowed it to display the suppliers diamonds and gems on its web site; some of these
arrangement entailed multi-year agreements whereby designated diamonds of the suppliers were offered to
online consumers only at Blue Niles websites.

Blue Nile did not actually purchase a diamond or gem from its suppliers until an order was placed by a
customer; this enabled Blue Nile to minimize the costs associated with carrying large inventories and limited
its risk of potential mark-downs.

9-9

Case 9 Teaching Note Blue Nile Inc. in 2010: Will Its Strategy to Remain Number One in Online Diamond Retailing Work?

Lean operating costs

The company had only 183 full-time and 5 part-time employees, along with 1 independent contractor, as of
early 2010. Operations were conducted via a combination of proprietary and licensed technologies. Blue Nile
licensed third-party information technology systems for financial reporting, inventory management, order
fulfillment, and merchandising. Redundant Internet carriers were used to minimize service interruptions and
downtime at its Web site. Various operating systems were monitored continuously using third-party software,
and an on-call team responded to any emergencies or technology issues. Management continuously explored
avenues to improve operating efficiency, refine its supply chain, and leverage its investment in fixed-cost
technology.

Blue Niles economical supply chain and comparatively low operating costs allowed it to sell comparable
quality diamonds, gemstones, and fine jewelry pieces at substantially lower prices than those of reputable
jewelers with one or more retail store locations.

Blue Niles lean costs and supply chain savings gave it a significant pricing advantage. For every dollar that
Blue Nile paid suppliers for stones, settings, and other purchased items, it sold its finished jewelry for a
markup of about 28 percent over cost. In contrast, Zale sold at an average markup of 88 percent over cost of
goods sold and Tiffany sold at an average markup over cost of goods sold of 130 percent.

Blue Niles cost-efficient supply chain nd lean costs enabled it to earn respectable profits selling at prices that
were substantially below those of locaal retail jewelry stores.

Free shipping with every order delivered to a U.S. address. All orders under $250 were shipped via FedEx Ground
if within the 48 contiguous states or by U.S. Postal Service for destinations in Hawaii and Alaska. Orders between
$250 and $1,000 were shipped via FedEx 2-day delivery. All orders over $1,000 and all loose diamond orders were
shipped via FedEx Priority Overnight. Customers had the option to upgrade the delivery of items under $1,000 to
FedEx Priority Overnight for a $15 charge.
A 30-day return policy
Providing customers with appraisalsBlue Nile automatically provided an appraisal stating the approximate retail
replacement value of the item to customers who bought (1) a pre-set engagement ring priced under $2500, (2) a
diamond jewelry item priced $1000 and over (except pre-set solitaire engagement rings, pre-set earrings, or pre-set
solitaire pendants priced $2500 or over which come with IGI appraisals), or (3) any custom diamond ring, earring,
or pendant. An appraisal represented value-added to customers because it was necessary to obtain insurance
coverage and determine what constituted equal replacement in case of loss, theft, or damage.

Which of the 5 generic competitive strategies is Blue Nile employing? If students

have already read Chapter 5, then you should press them at this point to identify which of the five generic competitive
strategies most closely fits the competitive approach that Blue Nile is taking. We think Blue Niles strategy
corresponds very closely to that of a classic low-cost provider strategy. What Blue Nile does is sell a diamond of given
cut, clarity, grade, etc. at a lower price than traditional retail jewelers because it has lower operating costs than they do.
Blue Niles customers have the freedom to choose whatever gem quality and settings they wish. Blue Nile is able to
provide customized jewelry products to its customers at appealing low prices because of its negligible inventory costs
and lower operating costswhich is what a low-cost provider strategy is all about.
Some class members may argue that Blue Nile is pursuing a best-cost provider strategy. But their case is somewhat thin
because Blue Nile doesnt really try to incorporate upscale features at a lower cost than rival online jewelers or brickand-mortar jewelry retailers and then sell its products at a lower price than rivals do. Indeed, Blue Niles competitive
approach is based on taking advantage of its low inventory costs and lean operating costs to sell diamond and other
gems of given cut, clarity, grade, etc. at a lower price. This is not the competitive approach of a best-cost provider. A
best-cost provider seeks to give customers more value for the money by satisfying buyer desires for appealing
features/performance/quality/service and charging a lower price for these attributes compared to rivals with similar
caliber product offerings. This is not what Blue Nile is doing.

9-10

Case 9 Teaching Note Blue Nile Inc. in 2010: Will Its Strategy to Remain Number One in Online Diamond Retailing Work?

It may be useful to point out here that with the exception of the price competition between online jewelry retailers and
brick-and-mortar jewelry retailers, there is little evidence of active price competition in the market for fine jewelry. For
instance, rival online jewelers are not aggressively trying to compete with one another by selling a diamond of given
cut, clarity, grade, etc. at a lower price than their online rivals. Nor do brick-and-mortar jewelry retailers actively and
regularly compete to sell a diamond of given cut, clarity, grade, etc. at a lower price than their brick-and-mortar rivals.

What type of competitive advantage is Blue Nile trying to achieve? Blue Nile is
definitely striving for a low-cost advantage over rivalsthis is pretty clear from the above portrayal of Blue Niles
strategy. So far, theres every indication that Blue Nile has a definite cost advantage over traditional brick-andmortar jewelry retailers. It is Blue Niles lower costs and lower prices that is allowing it to steal customers away from
store-based jewelry retailers and to grow its customer base at their expense.
However, Blue Nile may have little cost advantage over its online rivals, most of whom appear to employing very
similar competitive strategies and business models. Blue Niles competitive advantage over other online jewelry
retailers seems tied more to its brand name advantage that is attached to the trust it has built with customers and the
caliber of the purchasing guidance it provides to shoppers at its website.

4. What do you like and dislike about Blue Niles business model?
There is much to like about Blue Niles business model:
Very little inventory is required, which translates into negligible inventory costs. Brick-and-mortar jewelry retailers
have comparatively high inventory costs because they purchase their products from suppliers prior to selling them (so
as to have ample store inventories for customers to choose from).

The ability to generate cash 40 to 55 days ahead of the need to pay suppliers

In a very real sense, Blue Niles business model was self-funding because suppliers financed Blue Niles sales
growthsee Exhibit 5.

Readily scaleable to substantially higher sales volumes with minimal additional capital investment. Blue Niles
capital expenditures for facilities and equipment were a meager $2.3 million in 2009, $2.0 million in 2008, and
$4.9 million in 2007. Hence it takes little capital investment to grow the business.
Blue Nile is making attractive profits with its business model.
We see very little to dislike about Blue Niles business model. But, from a competitive perspective, it is a business
model that other online rivals can copy fairly easily.

9-11

Case 9 Teaching Note Blue Nile Inc. in 2010: Will Its Strategy to Remain Number One in Online Diamond Retailing Work?

5. What does a SWOT analysis of Blue Nile reveal about the overall attractiveness
of its situation?
Blue Niles Resource Strengths
The current market leader in the online retail jewelry segment by a wide margin
A better known brand name and reputation than other online jewelry rivals
A first-rate strategy and business model
A broad and attractive product line from customers to choose from
A user-friendly web site with good search functionality, very good educational information, and particularly good
purchasing guidance ( a core competence?)
A sizable and competitively potent cost advantage over traditional local jewelry stores due to lean operating costs
and a very cost-effective supply chain from the standpoint of inventory costs
Its collaborative partnership arrangements with important diamond/gem suppliers
Good product customization and order fulfillment capabilities (core competencies?)
An ability to grow sales with very little incremental capital investment
Blue Niles Resource Weaknesses
Limited brand name recognitionmany shoppers for fine jewelry have never heard of Blue Nile
Limited financial resources relative to bigger and better-known retail jewelry chains
There is nothing proprietary about Blue Niles strategy and business modelboth are subject to imitation by rivals
Market Opportunities
Geographic expansionentry into the markets of foreign countries
Lots of room to grow the business by attracting customers away from traditional local jewelry stores in the U.S.
Blue Nile still has such a relatively small (tiny!!!) market share of the total market for fine jewelry in the U.S. that
it can continue to employ its current strategy for many years. The more that the word spreads about Blue Niles
attractive prices and quality product offerings and the more it becomes a trusted place to shop for fine jewelry, the
more it stands to steal away customers from traditional local jewelers.
Product line expansion
External Threats
Growing competitive strength on the part of rival online jewelry enterprises that are employing much the same
strategy and business model
Increased interest on the part of major jewelry chains to sell jewelry at their websites; some of these have a brand
name that is more widely known than Blue Niles.

Diamond/gem suppliers either become less willing for Blue Nile to display their inventories on Blue Niles web
site or decide not to renew their multi-year agreements with Blue Nile whereby certain designated diamonds in
their inventories are offered to online consumers only at Blue Niles websites.

Untold numbers of people shopping for fine jewelry are very leery of buying fine jewel online and thus are not
likely to ever be customers of Blue Nile (or other online jewelry retailers).
9-12

Case 9 Teaching Note Blue Nile Inc. in 2010: Will Its Strategy to Remain Number One in Online Diamond Retailing Work?

Conclusions and Key Teaching Point Just making 4 lists is not all there is to SWOT analysis. The
payoff from SWOT analysis comes from the conclusions about a companys situation and the implications for strategy
improvement that flow from the four lists. Hence we urge that you press the class hard for the conclusions to be drawn
from the four listings above.
In the case of Blue Nile, we think the SWOT listings indicate that:
Blue Niles strategy, business model, resource strengths, and competitive capabilities put it in a very strong market
position to succeed in the online retail jewelry business in the upcoming yearsit is easy to understand why the
company has been successful (despite the obvious growth slowdown imposed by the sharp economic recession of
2008-2009).
Blue Nile would seem to have a sustainable cost advantage over traditional brick-and-mortar retailers of fine
jewelry.
Blue Nile has no resource weaknesses that make it highly vulnerable to competitive attack from local jewelers,
although its growth may well slow because of the growing competitive strength on the part of rival online jewelers
that are hoping to share in Blue Niles success.
Blue Nile has ample market opportunities to continue to grow its sales for many years to come.
The risks Blue Nile faces from external threats are quite tolerable and manageablethe companys long-term
business prospects seem quite good despite the intensifying competition from rival online jewelers.
In short, the SWOT analysis indicates that Blue Niles competitive market position is strong and that its prospects for
the future are bright.

6. What is your appraisal of Blue Niles financial performance based on the data in
case Exhibit 5? How well is the company doing financially? Is there evidence in
case Exhibit 5 that Blue Niles strategy is workingwhat is the story of the
numbers in case Exhibit 5?
If you have not already done so, we suggest that you urge class members to use the financial ratios in Table 4.1 of
Chapter 4 as a guide in doing the calculations needed to arrive at analysis-based answers in assessing Blue Niles recent
financial performance (and the financial performance assessments of companies in other assigned cases).
If students do a conscientious job of crunching the numbers in case Exhibit 5, they should come up with most of the
following:
Blue Niles revenues grew briskly from $203.2 million in 2005 to $319.2 in 2007 before being trimmed by the
effects of economic recession and a downturn in jewelry sales industrywide to $295.3 million in 2008 and $302.1
million in 2009.
Blue Niles bottom line grew from $13.1 million in 2005 to $17.5 million in 2007 before the recession-induced
fall-off to $11.6 million in 2008 and $12.8 million in 2009.
Blue Niles diluted earnings per share went from $0.71 in 2005 to $0.76 in 2006 to $1.04 in 2007 before tapering
off to $0.75 in 2008 and $0.84 in 2009.
Blue Niles financial ratios show a mixed picture:

9-13

Case 9 Teaching Note Blue Nile Inc. in 2010: Will Its Strategy to Remain Number One in Online Diamond Retailing Work?

2009

2008

2007

2006

2005

79.8%

79.7
%

79.6%

79.8%

77.8%

20.2%

20.3
%

20.4%

20.2%

22.2%

13.6%

14.9
%

13.4%

13.6%

13.3%

Operating income as a % of net sales

(operating profit margin)

6.6%

5.4%

8.3%

6.6%

8.9%

Net income as a % of net sales (net

profit margin)

5.2%

3.9%

5.5%

5.2%

6.5%

Current ratio

1.57

1.11

1.56

1.57

2.38

29.6%

60.3
%

27.5%

27.6%

16.1%

Days of inventory

30.0

29.2

30.3

26.6

27.2

Inventory turnover

12.2

12.5

12.2

13.7

13.4

Cost of sales as a % of net sales

Gross profit margin

SG&A expenses as a % of net sales

Net income as a % of stockholders

equity (return on equity or ROE)

The companys gross profit margin has eroded, and the erosion began in 2006.
The companys gross profit margin is down from 2005, but has been flat in the 20.2% to 20.4% range during 20062009.
SG&A expenses have creep upward, but were back down to a more respectable 13.6% in 2009 versus 13.4% in
2007 and 13.3% in 2005.
The current ratio has deteriorated but not alarmingly soand improved to a fairly healthy 1.57 in 2009.
Both operating profit margins and net profit margins have eroded, only partly because of recessionary forces (since
they were lower in both 2006-2007 as compared to 2005.
The companys stock repurchases in have had a positive effect on EPS and on ROE
Days of inventory and inventory turnover have deteriorated in the past three years.
The company seemingly has adequate cash to finance operations (since capital expenditures are a modest $5
million or so annually) and to fund share repurchases.
Net cash flow from operating activities has been good every year except 2008.

Conclusions: Blue Niles financial performance over the past several years is satisfactory, though far from
inspiring. Blue Niles financial performance in 2008 and 2009 has undoubtedly been negatively impacted by the
recession and by the industrywide downturn in jewelry sales. It would have been nice to see better performance in
2008-2009, but the performance has nonetheless been strong enough to confirm the viability of Blue Niles business
model and to signal that its strategy is working. All things considered, Blue Nile seems poised to improve its financial
performance significantly as the effects of recession disappear and economic recovery continues.
9-14

Case 9 Teaching Note Blue Nile Inc. in 2010: Will Its Strategy to Remain Number One in Online Diamond Retailing Work?

7. Does Blue Nile have adequate competitive strength to go head-to-head against

its rivals? Do a weighted competitive strength assessment using the
methodology presented in Table 4.4 of Chapter 4 to support your answer. Do you
believe that Blue Nile has built a sustainable competitive advantage in the
online retail jewelry business? Why or why not?
There is ample data in the Blue Nile case for students to do a solid competitor strength assessment using the
methodology described in Table 4.4 and the accompany text in Chapter 4. We suggest spending 10-15 minutes of class
time walking students through proper use of this analytical tool and thereby putting some punch behind their
opinions as to whether and why Blue Niles situation is attractive vis--vis its rivals.
Our weighted competitive strength assessments are shown in Table 1 of this note. We opted to do strength ratings of
Blue Nile versus other online-only jewelers versus local retail jewelers as a group versus major retail jewelry chains
(as a group) because it seemed to be the best way to get at Blue Niles competitive strength. Just rating Blue Nile
against other online-only retail jewelers (like Diamonds.com, Ice.com, Whiteflash.com, and JamesHarris,com) is an
incomplete strength assessment since Blue Nile faces strong competition from other types of jewelry retailers besides
just those selling online.
TABLE 1

Weighted Competitive Strength Assessments of Selected Jewelry Industry

Rivals
(Rating scale: 1 = weak, 5 = average, 10 = strong)
Blue Nile
Key Success Factor/Competitive
Strength Measure

Other Online-only
Jewelers

Importance
Weight

Rating

Weighted
Score

Rating

Weighted
Score

Breadth of product line

0.15

10

1.50

1.20

Reputation/image

0.25

1.00

0.50

Quality/appeal of product offerings

0.15

1.05

0.90

Caliber/completeness of product
information provided to customers

0.15

10

1.50

1.20

Relative cost position

0.10

10

1.00

0.90

Customization capabilities

0.10

10

1.00

0.90

Supply chain capabilities

0.10

10

1.00

0.80

Sum of the weights

1.00

Overall Weighted Strength

Rating

8.05

9-15

6.40

Case 9 Teaching Note Blue Nile Inc. in 2010: Will Its Strategy to Remain Number One in Online Diamond Retailing Work?

Local Retail
Jewelers
Key Success Factor/Competitive
Strength Measure

Major Retail
Jewelry Chains

Importance
Weight

Rating

Weighted
Score

Rating

Weighted
Score

Breadth of product line

0.15

0.45

0.60

Reputation/image

0.25

2.25

1.75

Quality/appeal of product offerings

0.15

0.90

1.05

Caliber/completeness of product
information provided to customers

0.15

0.90

1.00

Relative cost position

0.10

0.20

0.50

Customization capabilities

0.10

0.40

0.50

Supply chain capabilities

0.10

0.30

0.60

Sum of the weights

1.00

Overall Weighted Strength

Rating

5.40

6.00

Conclusions: Students can differ in their competitive strength evaluations because of using different strength
measures, different weightings, and different rating scores. But we think they their analysis should come out with a
competitive strength rating for Blue Nile that indicates Blue Nile has the resource strengths and capabilities to do quite
well in competing against other jewelry industry participants. The competitive strength ratings in Table 1 show Blue
Nile as being the strongest player, all things considered. There is some justification for such a surprising conclusion:
Blue Nile has a stronger relative cost position versus local and chain retailers (due to its lean operations and costeffective supply chain arrangements with diamond/gem suppliers). Thus, it has the ability to charge substantially
lower prices for items of the same quality than its key brick-and-mortar competitors.
It has a substantially wider product line and bigger product selection as compared to most all other jewelers.
Blue Nile has potent product customization capabilities in the industry and can do customization quickly and cost
effectively.
It provides extensive and trustworthy information about its diamonds and gems to customers/shoppersmuch
more so than one is typically going to get from clerks in a local jewelry store or chain jewelry store.
Blue Nile provides customers with a positive, satisfying jewelry shopping experience.
Of course, Blue Niles big weakness at present is that Blue Nile is not a well-known name in jewelrybut this can be
overcome in time via word-of-mouth and growing shopper familiarity with Blue Nile. As it does this, Blue Nile will be
able to steal sales and customers away from traditional brick-and-mortar jewelry retailers in sufficient numbers to
produce a growing and profitable business.
Hence we think students should see Blue Nile as a potent competitoreven if they do not give it the highest weighted
competitive strength rating.

9-16

Case 9 Teaching Note Blue Nile Inc. in 2010: Will Its Strategy to Remain Number One in Online Diamond Retailing Work?

8. What strategic issues and problems does Blue Nile management need to
address?
Several issues stand out at Blue Nile:
How to attract a growing volume of traffic to the Blue Nile web site?
How to build the Blue Nile brand name and raise shopper awareness of the companys very attractively-priced
product offerings?
How to make jewelry shoppers even more comfortable and confident in purchasing from Blue Nile?
What to do to bolster the financial performance?

9. What does Blue Nile need to do to strengthen its competitive position and
business prospects vis--vis other online rivals and traditional jewelry store
competitors?
Very clearly, Blue Nile should continue with its present strategy and business model. Both are working. It has a potent
strategy for growing its business and satisfying customers.
While the company certainly needs to improve its financial performance, this will likely occur fairly quickly as the
economy recovers, diamond and fine jewelry sales industrywide begin rising again, and Blue Niles revenues increase
accordingly. The company has been hurt by the recession, but it has weathered the tough economic conditions rather
well and remained reasonably profitable.
Specific actions that students might recommend include the following:
Management needs to push to boost profit margins to 2005 levels or even higher. This can be accomplished by
paying a bit closer attention to controlling SG&A expenses and inventory levels, as well as to keeping prices at
levels needed to attract growing numbers of customers.
The company should continue to push sales growth internationally, at its web sites in Canada and the United
Kingdom.
Online advertising is probably crucial to attracting more site traffic and expenditures for online advertising should
be increased as funds permit.
From time to time, the company could off special promotions on particular gems and jewelry items.
In the years to come, top priority needs to be given to growing Blue Niles business, building its brand name
franchise, and expanding shopper awareness of the Blue Nile web site and product offerings.
We suggest spending 5-10 minutes of class time getting students to put forth their suggestions as to what specific
actions Blue Nile management can take to address the four issues set forth in the preceding question.

9-17

Case 9 Teaching Note Blue Nile Inc. in 2010: Will Its Strategy to Remain Number One in Online Diamond Retailing Work?

Epilogue
In late September 2010, Blue Nile introduced a Blue Nile App for the iPhone, iPad, and iPod Touch. The Blue Nile App
allowed customers to search for diamonds based on certain specifications, view available diamonds, connect to Blue Niles
Diamond & Jewelry consultants, and even purchase a diamond through their iPhone, iPad, or iPod touch. The Apps
Dream Box feature allowed consumers to browse thousands of one-of-a-kind rings created by Blue Nile and included a
comparison shopping tool and a diamond education guide. The Blue Nile App was available for free at www.itunes.com/
appstore/.
In November 2010, Blue Nile announced that beginning on Cyber Monday (the Monday following Thanksgiving weekend)
it would launch a series of limited edition Holiday Exclusives never-before-available jewelry on www.bluenile.comfor
up to 44 percent off. Each day through December 23rd at midnight a new Holiday Exclusives piece was revealed.
Customers then had 24 hours (or while supplies last) to purchase the daily deal. All orders placed on Cyber Monday were
upgraded to free FedEx Priority Overnight shipping. Blue Niles Holiday Exclusives included only specially-selected items
that had never before been offeredthey were not markdowns of overstocked merchandise. Holiday Exclusives were
priced to fit every budget, ranging from $50 (regularly $85) pearl cuff bracelets to a $39,000 (regularly $65,000) 28-carat
opera diamond necklace. Shoppers who like the Blue Nile page on Facebook got the first look at the Holiday Exclusives
and the opportunity to browse and buy before the rest of the world. Bargain hunters could also follow Blue Nile on Twitter
@bluenilediamond to receive alerts before the sales began.
Blue Nile reported improved financial results for 2010. Net sales in 2010 were $332.9 million, up 10.2 % over 2009.
Operating income rose 10.0% to $21.3 million; and net income totaled $14.14 million, or $0.94 per diluted share. Other
financial highlights included the following:
Net cash provided by operating activities was $33.7 million for the trailing twelve month period ended April 1,
2007, compared to $31.5 million for the trailing twelve month period ended April 2, 2006.
Cash and marketable securities totaled $59.2 million at April 1, 2007.
Gross profit for the first quarter of 2007 increased 28.1% to $13.2 million, compared to $10.3 million in the first
quarter of 2006. Gross profit as a percentage of net sales was 19.5% in the first quarter of 2007 compared to 20.4%
in the first quarter of 2006.
As a percentage of net sales, selling, general and administrative expense declined to 14.1% in the first quarter, from
15.1% in the first quarter of 2006. Selling, general and administrative expense for the first quarter of 2007 was
$9.6 million, compared to $7.7 million in the first quarter of 2006.
Capital expenditures in the first quarter of 2007 totaled $0.2 million, compared to $0.6 million in the first quarter
of 2006.
International sales, representing the Companys Canada and U.K. websites, totaled $2.6 million in the first quarter,
an increase of 84.1% year over year.
During the quarter, Blue Nile repurchased 344,655 shares of its common stock for $13.5 million. Since the
inception of its stock repurchase program in February 2005, the company had repurchased approximately 2.7
million shares of its common stock, or 15.2% of shares outstanding, at an average price of $32.75.
For the very latest information on developments at Blue Nile, we urge that you check the press releases and the investor
relations sections at www.bluenile.com.

9-18